Can This Guy Really Run a Big Bargain Basement? : Retailing: Pic ‘N’ Save chief Lewis Merrifield certainly thinks so. If he fails, it won’t be for want of trying.

No one doubts Lew Merrifield’s intelligence. When he isn’t running the Pic ‘N’ Save retail chain, he says, he devours books--as many as seven or eight a week--and he finished No. 1 in the USC Law Center Class of 1966.

No one questions Merrifield’s intensity, either. A heavy-smoking, thickset powerhouse, he works seven days a week and, associates say, rarely talks about anything but business.

But does Lewis B. Merrifield III have what it takes to get the job done at Pic ‘N’ Save, the company he took charge of nearly four years ago? Has this one-time whiz in the button-down world of corporate securities law also mastered the art of operating bargain-basement stores? On that point, he has detractors.

In fact, Merrifield’s job is on the line. A takeover-minded investment group, Girard Partners, pressed him to put Pic ‘N’ Save up for sale, citing the company’s 34% earnings decline last year and its sagging stock price.

If Merrifield fails to snag a buyer by a July 15 deadline, Girard is expected to resume its campaign to win enough support from shareholders to seize control of the company. Girard has said it then would either buy Pic ‘N’ Save and oust Merrifield, or sell the company to a higher bidder.

Merrifield gets credit for turning a seat-of-the-pants company into a professional organization that remains very profitable, but critics say he has overdone the overhaul in some respects. They maintain that Pic ‘N’ Save stores have become too neat and too much like conventional discount chains, deterring some bargain-hunters who enjoy sifting through messy piles of surplus or passe merchandise.

“The stores are too pretty,” said Edward Randolph, a supplier to close-out stores and a former Pic ‘N’ Save shareholder. “People don’t think they’re getting bargains when items are lined up like soldiers.”

Part of the problem, critics say, is that Merrifield seems to lack an instinctive feel for the boisterous close-out retail business. “There’s an extra gene that merchants are born with, that you can’t compensate for with a computer,” said an industry observer who asked not to be identified.

Critics also fault Merrifield for expanding too quickly and, in particular, for buying the struggling Job Lot Pushcart chain in the New York area. Pic ‘N’ Save now has 189 close-out stores, about double the total when Merrifield took charge.

Merrifield, 50, staunchly defends his performance, saying he inherited a business that had been milked by its prior bosses and was likely to be clobbered by emerging competitors. In fact, profit margins and sales gains were falling when he arrived.

“There’s no such thing as a perpetual motion machine, where you don’t do anything and it still works,” he said. “The signs of erosion were there.”

The only strategic mistake Merrifield confesses is failing to get the word out about the difficulty of the task he faced in turning Pic ‘N’ Save into an efficient, modern corporation.

If investors expect a lot of Merrifield, it may be partly due to his pay. For serving as president and chief executive last year (he’s now chairman, too), Merrifield got $975,000.

Compensation consultants say that easily ranks in the top 10% for heads of companies the size of Pic ‘N’ Save, which had sales of $475 million last year. By comparison, John V. Roach, the head of Tandy Corp.--a company nine times bigger and one that posted a higher after-tax return on sales in 1989--made $971,000.

Board members say the pay was justified by the difficulties of the unpredictable close-out business, Merrifield’s success in preparing the company for the future and his heavy workload.

“I don’t think he’s ever heard of a 40-hour week. I wouldn’t be surprised if he put in twice that much time,” said Stafford R. Grady, chairman of the compensation committee.

Merrifield lives very well, but not lavishly by Southern California standards. Twice-divorced, he has custody of his 5-year-old son and 10-year-old daughter by his second marriage, and he shares a rented house with them in the flats of Beverly Hills. He motors down to Pic ‘N’ Save’s headquarters in Dominguez in a navy blue Lincoln Continental.

When he isn’t working, he reads books on everything from organizational behavior to Taoism. Merrifield also meditates and occasionally practices martial arts.

The son of an insurance executive, Merrifield grew up in Glendale and studied economics at UCLA before law school. He has long had a reputation as a quick study, said George Vandeman, a former USC classmate who is now the partner in charge of mergers and acquisitions for the law firm Latham & Watkins.

“I would have to study 10 hours for a particular test to get the No. 2 grade,” Vandeman said. “He’d have to study 20 or 30 minutes to get the No. 1 grade.”

Vandeman also is friendly with Merrifield’s nemesis, David H. Batchelder, the head of Girard Partners and a former chief strategist for corporate raider T. Boone Pickens Jr. Vandeman describes Merrifield as the “much more serious personality.”

“David is a very smart guy, but he relies more on instincts developed by his experience,” Vandeman said. “Lew will think things through at much greater length before coming to a decision.”

Merrifield clerked for the late Supreme Court Justice William O. Douglas, taught law at USC for two years before practicing with Gibson, Dunn & Crutcher and, later, opened his own practice.

Merrifield joined Pic ‘N’ Save’s board in 1971 after doing the legal work to take the company public. Over the years he became increasingly interested in the business, and he emerged as the architect of the board’s plan to put the company on a course of modernization and expansion.

In November, 1986, Merrifield became Pic ‘N’ Save’s chief executive. As Merrifield and his senior executives tell it, Pic ‘N’ Save was in dire need of help.

Bill-paying methods were so outdated, they say, that a senior executive had to sign every check, no matter how small. They say accounting was so crude that the company couldn’t tell how any one store was doing. To shore up the company, computer systems and training programs were introduced. Stores were remodeled.

But investors are unimpressed. Shares have fallen from around $21 when Merrifield took over to $12 or $13 recently.

Gauging the company’s performance under Merrifield is a matter of perspective. With earnings of $30.9 million last year, the company’s after-tax return on sales was a strong 6.5%, versus an industry standard of roughly 4%. When Merrifield came in, the company’s return was sliding, but was still an almost unheard-of 13.1%.

Company officials point to a first-quarter profit increase of 9.6% this year as a sign that the company is bouncing back.

Barry Rothberg, an analyst with Mabon, Nugent & Co., says Merrifield can be faulted for rapidly expanding Pic ‘N’ Save from its lucrative niche in Southern California into other parts of the West, as well as the South and the New York area. Expansion “has proven to be a very difficult task, and he has failed at it. Could anyone have done it? I don’t know,” Rothberg said.

Rothberg added that if Merrifield gets a few more years for his long-term strategy, he might prove his critics wrong. But time may be running out.

Girard Partners appeared to be gaining shareholder support for its effort before a temporary cease-fire was called to let Pic ‘N’ Save concentrate on looking for a buyer. Even if the company finds a buyer, the new owner might want new management.

If Merrifield is forced out, it would be a tough blow for a man who says he has “loved the business a long time.” Still, he claims he doesn’t spend any time worrying about what might be.

Said Merrifield, “You have to be very focused.”